Pound Sterling steadies after UK GDP data shows economy stalled in April

• The Pound Sterling holds to recent gains around 1.2750 even as the UK economy remained stagnant in April.
• UK Manufacturing output and Industrial Production contracted significantly in April.
• Market sentiment remains cautious ahead of US inflation data and the Fed’s decision.

The Pound Sterling (GBP) hovers around 1.2750 against the US Dollar (USD) in Wednesday’s London session, broadly unaffected by the United Kingdom's (UK) monthly Gross Domestic Product (GDP) and Industrial Production data for April. The UK Office for National Statistics (ONS) reported that the economy remained stagnant, as economists expected, signaling a subdued start to the second quarter.

The UK economy failed to grow in April as a mild expansion in the services sector was offset by a decline in Industrial Production and construction output. The decrease in manufacturing sector activity was driven by lower production in the pharmaceutical and food sectors, the data showed.

Manufacturing Output and Industrial Production data, which measure factory activity, contracted at a faster pace than expected in April after expanding in March. Monthly Manufacturing Production declined by a sharp 1.4% vs. expectations of a slight fall of 0.2%. In the same period, Industrial Production dropped by 0.9% against expectations of a meager 0.1% decline.

Weak factory data suggests that households and businesses struggle to bear the burden of high interest rates by the Bank of England (BoE). This could force the BoE to start easing its monetary policy sooner.

Still, other indicators may prompt policymakers to hold back calls for rate cuts. UK wage growth remains high, becoming a major barrier for the BoE to return to policy normalization. Wages rose steadily by 6.0% in the three months to April, which is significantly higher than what is needed for inflation to return to the desired rate of 2%.

Daily digest market movers: Pound Sterling to remain volatile ahead of US CPI, Fed’s decision

• The Pound Sterling is slightly firm against the US Dollar ahead of the United States (US) Consumer Price Index (CPI) data for May and the Federal Reserve’s (Fed) monetary policy announcement in the New York session. The inflation data will significantly influence market expectations about when and how far the Fed will reduce interest rates this year. Recently, stronger-than-projected employment creation and wage growth have already diminished expectations for the Fed to begin lowering key borrowing rates from the September meeting.
• Annual core inflation, which strips off volatile food and energy prices, is estimated to have decelerated to 3.5% from April’s reading of 3.6%. In the same period, the headline inflation is expected to have grown steadily by 3.4%. While monthly headline inflation is forecasted to have grown at a slower pace of 0.1% from the former release of 0.3%, the core CPI is estimated to have maintained a steady growth rate of 0.3%.
• Volatility is expected to be high in Wednesday’s American session as the US inflation data will be followed by Fed’s monetary policy decision. The Fed is widely anticipated to leave rates unchanged at current levels of 5.25%-5.50%. Therefore, investors will pay close attention to Fed’s dot plot, which indicates where policymakers see the federal fund rate heading in medium and long-term time frames.
• Recent economic data suggests that labor market conditions are tight and price pressures are still high, so Fed policymakers are expected to be more hawkish compared with the last dot plot. Officials are expected to argue in favor of at most two rate cuts this year against three projected in March’s dot plot.

Technical Analysis: Pound Sterling remains supported 

The Pound Sterling shows a cautious recovery move from an almost two-week low of 1.2690 ahead of key US economic events. The GBP/USD pair continues to remain well-supported by the 20-day Exponential Moving Average (EMA), which trades around 1.2714. Also, the 50-day EMA is sloping higher, suggesting that the near-term trend is still upbeat.

The Cable still holds the 61.8% Fibonacci retracement support at 1.2665, which is plotted from the March 8 high of 1.2900 to the April 22 low at 1.2300.

The 14-period Relative Strength Index (RSI) has shifted into the 40.00-60.00 range, suggesting that the momentum is losing strength.